Qatar scraps floor, cap in gas price formula with India

NEW DELHI :The world's largest gas exporter Qatar has slashed the price of gas it supplies to India by almost half by removing a floor and cap in the pricing formula, but has introduced a small fixed component to protect its interest.

The revised formulation, which came into effect from January 1, has led to a reduced cost of liquefied natural gas (LNG) from Qatar to about $6.5-6.6 per million British thermal unit (mmBtu) from the last billed $12.60 per mmBtu.

Under an existing 25-year contract, RasGas of Qatar will price 7.5 million tonnes a year of LNG it sells to Petronet LNG at 12.66 per cent of 3-month average price of Brent crude. To this, a fixed component of about $0.60 per mmBtu will be added, sources privy to the development said.

So, if the 3-month average price of Brent is $45 per barrel, the gas price comes to $5.7 per mmBtu. Once the fixed component is added, that makes it $6.3 at the time of dispatch of LNG in ships from Qatar ports.

The cost of shipping the gas in its liquid form (LNG) from Qatar to India is $0.33 per mmBtu and so, the delivered price of the gas at Dahej in Gujarat will be $6.63.

Sources said RasGas previously priced LNG at 12.66 per cent of 12-month moving average of the basket of crude oil imported by Japan (Japanese Crude Cocktail). This formula had a rolling ceiling and floor of 60-month average JCC, plus or minus $4.

While the international oil prices dropped to multi-year lows in 2015, this ceiling and floor meant that LNG cost to India would remain at highs of $12-13 per mmBtu even though gas in spot or current market was available at half the rate.

This floor and ceiling had benefited India when rates remained at $8-9 despite crude oil shooting up to $147 a barrel and LNG rates touching a record $20 per mmBtu.

The price change will help India save billions of dollar in energy cost during the remainder of the 25-year contract ending April 2028, they said.

This is not the first time that pricing of the LNG under this contract has been changed.

RasGas had in 2002 agreed to sell gas to Petronet at a floor equivalent to $16 a barrel of oil price and ceiling of $24 a barrel. This translated into a minimum gas price of $2.01 per mmBtu and a maximum price of $3.04 per mmBtu.

In 2003, however, Petronet renegotiated the price and went for a fixed price at $20 per barrel oil ($2.53 per mmBtu) for five years from 2004 to 2009. For the next five years, it agreed to a price linked to moving average of the last 5 years of crude oil and thereafter direct indexation with crude oil.

Sources said this led to the price going up by $1 per year for five years from 2009, and from January 2014 to $12.66 per mmBtu at oil price of $100 per barrel.

Had Petronet not changed the contract, the price of LNG from Qatar would have been $3.04 per mmBtu for 25 years.